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Benton v. Merrill Lynch & Co.

March 7, 2007

WILLIAM B. BENTON, ET AL. PLAINTIFFS
v.
MERRILL LYNCH & CO., INC.; REFCO, LLC DEFENDANTS



The opinion of the court was delivered by: Garnett Thomas Eisele United States District Judge

ORDER GRANTING IN PART MOTION TO DISMISS

Before the Court is Defendant Merrill Lynch & Co., Inc.'s Motion to Dismiss, to which Plaintiffs have responded. For the reasons stated below, the Court concludes that Plaintiffs' claims for negligence claims and breach of the Arkansas securities laws will be dismissed without prejudice, but denies Defendant's motion with respect to Plaintiffs' fraud claim at this time. While a serious issue is presented as to the legal viability of Plaintiffs' fraud claim against Merrill Lynch, the Court will permit Plaintiffs to file an Amended Complaint, as requested, to more particularly allege their fraud theory.

BACKGROUND

Plaintiffs are various individuals or business entities who loaned money to David Howell in anticipation of a significant return on their investment.

Plaintiffs allege that Howell falsely claimed that he had devised a system of investing which yielded returns of ninety or sixty percent. Although Howell did not want the responsibility of borrowing the Plaintiffs' money, it is alleged that he devised a scheme whereby he agreed to borrow money from Plaintiffs, invest the money as his own, and pay a specified return on the "borrowed" funds. The agreement was reduced to written promissory notes. Several representative samples of the fixed rate promissory notes are attached to Plaintiffs' Complaint. The notes provide that Howell will pay a specified rate of interest (25% or 37% in the sample notes attached to the Complaint) in promised monthly installments until the principal and interest are paid in full.

Plaintiffs further contend that Howell's system of futures trading often failed to yield the promised high returns and that Howell used their investment principal, rather than profits, to make their monthly payments and also for his personal use and benefit. It is alleged that Howell was operating the same scheme with two different investor groups, which enabled him to falsely claim that half of the total funds invested belonged to him when in fact said funds belonged to the other investor group.

Plaintiffs contend that during the Summer of 2002, Mr. Howell was unable to meet the margin calls made by the Defendants. David Howell died in October of 2002. Plaintiffs contend that they lost millions of dollars in damages after Howell was unable to pay Plaintiffs the promised return on their investments.

Plaintiffs allege that Merrill Lynch "knew or reasonably should have known" that Howell "did not meet the separate and specific written requirements to establish and trade an institutional account" but that it nevertheless permitted him to place orders for the purchase and sale of futures contracts as an institutional account. (Complaint at ¶ 8). Plaintiffs contend that the Defendants were negligent in allowing Howell to trade futures contracts as an institutional trader when they knew or reasonably should have known that he was not qualified to do so. (Complaint at ¶ 11). Plaintiffs further allege that Merrill Lynch "knew or reasonably should have known that Howell was virtually impecunious and that in fact he was trading futures contracts using funds obtained from plaintiffs." (Complaint at ¶ 9).

Paragraph 12 of the Complaint asserts that "Howell engaged in a series of misrepresentations" and lists a series of false statements and representations by Howell. Plaintiffs allege that Howell "made these representations to plaintiffs full well recognizing that each was false with the intent to deceive them for his personal benefit." The Complaint is devoid, however, of any allegations that Merrill Lynch assisted Howell in making these false statements or that it even knew of Howell's misrepresentations to Plaintiffs.

Plaintiffs allege that Merrill Lynch should be held jointly responsible, along with Howell and the Howell trust, for their damages. Plaintiffs also claim that Merrill Lynch aided Howell and the Howell trust in violating the securities laws of the state of Arkansas. Plaintiffs seek damages, rescission, and punitive damages.

LEGAL STANDARD

Dismissal of a complaint pursuant to Rule 12(b)(6) is appropriate only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of [the plaintiff's] claim which would entitle [the plaintiff] to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The Court must take a plaintiff 's well-pleaded allegations as true and construe all reasonable inferences in a plaintiff's favor. Estate of Rosenberg v. Crandell, 56 F.3d 35, 36-37 (8th Cir. 1995). Thus the issue to be decided by the Court under Rule 12(b)(6) is whether a plaintiff is entitled to present evidence to support his or her claims, not whether a plaintiff will ultimately prevail. Id. at 37. "[A]s a practical matter . . . only in the unusual case in which a plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief" should a motion to dismiss be granted. Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir.1997). The Court is obligated at this stage in the litigation to assume the facts pleaded are true and to construe those facts in the light most favorable to the Plaintiffs. Gebhardt v. ConAgra Foods, Inc. 335 F.3d 824, 829 (8th Cir. 2003).

A complaint should not be dismissed "merely because it does not state with precision all elements that give rise to a legal basis for recovery." See Schmedding v. Tnemec Co., Inc., 187 F.3d 862, 864 (8th Cir.1999) (citing Bramlet v. Wilson, 495 F.2d 714, 716 (8th Cir.1974)). "At a minimum, however, a complaint must contain facts sufficient to state a claim as a matter of law and must not be merely ...


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